Predictability of PEG Ratio in Comparison with PE Ratio for Determining the Stock Price

Abstract

Price to earnings ratio is commonly used by analysts for assessment of stocks. Failures to consider the time value of money and growth prospective of companies are the main limitations of applying this method to estimate the value of shares. Recently, another ratio named PEG is used for identifying desired stocks. PEG ratio defines as quotient of PE ratio on expected growth rate. This ratio is based on P/E ratio based on PE ratio and considers stock’s growth perspective. The goal of this research is investigating the predictability of PEG ratio in comparison with P/E ratio for determining the stock price. The first hypothesis compares stability of P/E and PEG ratios and the second compares forecast accuracy of PE and PEG pricing methods. Financial information from215 firm-year during the period 1381 (2002) to 1389 (2011), indicated that PE ratio has more stability than PEG ratio and forecasting stock price by PEG method is more accurate.

Keywords

• PE Ratio
• PEG Ratio
• Stock Price
• Growth Rate